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The tax bill in Congress aims to reduce rates and close loopholes. We often speak of expanding opportunity for the middle class. Current tax law has provisions aimed at that by supporting access to higher education. I hope the bill will preserve and enhance those provisions, especially as they apply to endowments and the deductibility of charitable contributions.

Higher education purposely operates at a loss. When we add tuition, fees and room and board to state and federal assistance grants and loans, revenue typically does not equal our cost of doing business. Donors who support future students often bridge the resulting deficit. Donors fund scholarships that subsidize students’ education decades later. Universities only spend a given portion of the scholarship earnings, thereby preserving the initial investment.

If a donor provides $100,000, for example, a university might choose to spend 4 percent of the earnings annually on a scholarship. The student receives a $4,000 scholarship and the original funds are invested so future collegians can receive a similar financial award.

Our tax laws rightfully restrict the ability of universities to spend the original donation. In return, the donor receives a tax deduction and the university, as a nonprofit, does not pay taxes on the endowed scholarship funds.

Unfortunately, the tax bill proposes a 1.4 percent tax on endowment funds. The original proposal set a threshold of $100,000 in endowment per full-time student for the tax. The vast majority of private institutions in Northeastern Pennsylvania do not meet this financial threshold and, therefore, would pay no tax. A more recent policy suggestion raised the ceiling to $250,000.

Lawmakers need to understand how this policy erodes the ability for colleges and universities to collaborate with donors to fund educations. These gifts will be siphoned away to pay for a tax cut.

There is little doubt the tax rate will increase and the threshold will decrease over time. Therefore, a tax aimed at the wealthiest private institutions will eventually impact smaller institutions. Coupled with an increase in the standard deduction, as proposed in the bill, we can expect to see less giving to endowed scholarships if the bill passes.

Where will higher education make up the difference? If private colleges have fewer donor-supported funds to award to students, they may seek education in the public sector or draw more heavily on state and federal programs. Both options put additional strain on government and negate the benefits of any tax on endowments.

Conversely, if colleges and universities have to ask students for more, they will incur additional debt. Another likely result is that fewer students will enroll and complete degrees. Over time they will pay less in payroll and other taxes. The tax cut would reduce future taxes and economic development.

A better path is to seek ways enabling our tax code to support investment and economic growth. An educated workforce is key to boost productivity, which will increase personal and corporate earnings. As a result, the federal government can achieve long-term growth in tax revenue without taxing gifts given in the hope of a better future for students.

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